Openness and efficiency of India and China relative to the world economy: a comparative study.

Abstract

This paper adopts a dynamic approach to investigate the impact of openness on efficiency improvement of the world economy and compares the linkages between openness and performance in India and China. Based on a panel of data set of 126 countries over the period 1970-98, the world production frontier is established using stochastic frontier techniques. The economic efficiency of an economy relative to the world production frontier is identified and its determinants are examined. The results indicate that international trade, foreign direct investment (FDI) and its interaction with labour quality improvement play a significant role in improving efficiency, respectively, although the trade growth in our test is not as robust as FDI. Contrary to the conventional perception, India performed better than China in raising productivity until the mid-1990s. However, China has experienced a higher degree of openness and therefore a faster rate of catching-up with the world's best practice.